Wed, 02/11/2011 - 14:46
In spite of having registered significant investor appetite in recent years, empirical research on Alternative UCITS is a rare commodity. The major contribution of a new Lyxor research report is therefore to give investors a precise measure of the main characteristics of publicly regulated Alternative UCITS vehicles in comparison to traditional hedge funds, says Stefan Keller of Lyxor Asset Management…
For the first time, a comprehensive set of data has been analysed on a period from June 2004 to May 2011. The results shed light on what really matters for investors: regulation, manager skills and risk.
Regulation matters. The UCITS contribution to the hedge fund industry is to allow for a publicly regulated environment for hedge-fund like strategies. This framework has brought a new public offering by hedge fund managers to a new investor audience. However, the UCITS regulation is not well adapted to Hedge Fund strategies as a UCITS cannot easily use borrowings or directly short assets. As a result, the use of derivatives is an obligation for a large number of strategies, which can be costly. The findings of this study show that the regulatory constraints come indeed with a cost on performance. The average cost associated for accessing hedge-fund like strategies in the UCITS framework amounts to 432 bps on an annual basis. However, the performance impact of the regulation differs from one strategy to another. More specifically, highly concentrated (“conviction”) bets or those based on commodities cannot be expressed easily in the UCITS format, leading to significant underperformance in the CTA or Global Macro buckets.
Manager skills matter. The study finds that the performance of Alternative UCITS is affected not only by regulation but also by the skill set of the manager. In particular, hedge fund experience counts when choosing a manager for an Alternative UCITS product. Compared to managers with a “long only” background, hedge fund experienced managers bring incremental value in the Alternative UCITS context. On an annual basis, the average incremental value amounts to 100 bps, among all strategies. Interestingly, the outperformance of hedge fund experienced managers is highest among the CTA and Global Macro strategies, limiting somewhat the higher regulation costs discussed above.
Risk matters. Alternative UCITS present a more moderate risk profile than traditional hedge funds. For example, this study shows that the impact of the 2008 financial crisis on Alternative UCITS has been much smaller than on the hedge fund industry as a whole. While hedge funds analysed in this study present an annual volatility of 6.97%, Alternative UCITS show a volatility of 2.81%. Again, hedge fund experienced managers tend to outperform managers without hedge fund experience as volatility of Alternative UCITS with hedge fund skilled managers is further reduced and amounts for 2.52%.
To some extent, Alternative UCITS are a “deleveraged” version of hedge funds, with lower risks and lower performance. Overall, the risk/return profile of Alternative UCITS funds is appealing for a larger public as risk-adjusted returns are in line with those of hedge funds.
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